Truth In Advertising In Telecommunications And Electricity"

I. Introduction

Thank you Commissioner Jacobs for that introduction. I am delighted to be here this afternoon to talk with you about Truth in Advertising in Telecommunications and Electricity.

My goal today is to: 1. Provide a brief summary of the FTC's Advertising Law 2. Discuss the Joint FCC/FTC Policy Statement For The Advertising of Dial-Around and other Truth in Long Distance Services to consumers(1) 3. Describe the Commission's consumer protection position in the electric power industry deregulation debate

As a courtesy to my colleagues on the Commission, I will begin with the usual disclaimer: the views I express here are my own and are not necessarily those of the Commission or any individual Commissioner.

II. Background

With the explosion of competition and innovation in the telecommunications and electricity markets, consumers now have more choices in deciding which products and services they want to use. We have seen that as regulated industries become deregulated, the advertising for the industries' products and services progresses from very general advertising claims to more specific claims. Along with the freedom to promote specific attributes of products and services comes the possibility of making misleading claims, inadvertently or otherwise.

With the proliferation of advertising for Dial-Around and other long distance services, we have heard increased consumer complaints. To address issues raised by these services and their advertising, the FCC and FTC held a joint workshop last November. As a result of the workshop, the FTC and FCC announced the release of a Joint Policy Statement last week providing guidance to industry on acceptable advertising practices. You may access the Statement on the FTC web site at FTC.GOV.

The FTC's of truth-in-advertising law that has been developed through Section 5 of the FTC Act, which prohibits "unfair or deceptive acts or practices," provides helpful guidance to long distance carriers.

A. General Concepts of Advertising Law

Today, I will describe how the concepts of advertising law apply to the advertising of telecommunications services and electricity. In general, Commission law requires that advertising be truthful, fair, and substantiated.

Each of these concepts is detailed in formal policy statements adopted by the Commission or addressed by statute. A deceptive act is one that contains a misrepresentation or omission that is likely to mislead and be detrimental to consumers who are acting reasonably under the circumstances.(2) An unfair act or practice is one which causes or is likely to cause substantial consumer injury, not reasonably avoidable by consumers themselves, and not outweighed by countervailing benefits.(3) Although the Commission challenges conduct that is unfair, the majority of our actions in the advertising area target deceptive ads.

The Commission's substantiation doctrine is perhaps the most important legal doctrine for national advertising.(4) It requires that advertisers have a reasonable basis for any objective claim at the time the claim is made. In general, the necessary level of substantiation will depend on the type of product, the type of claim, the benefits if the

claim is true, the consequences if the claim is false, and the ease and costs of developing substantiation for the claim.

In all advertising cases, the Commission must determine exactly what claims are made, and whether there is substantiation to support those claims. We look at both express and implied claims. Express claims are claims that unequivocally state the representations. For example, an ad which says: "long distance services to 100 countries" makes an express claim. Implied claims are anything else and range on a continuum from language that is virtually express to language that literally says one thing but strongly suggests something else. For example, an ad which says: " 7 cents a minute" may make an implied claim that there is no minimum charge for each call. In determining the claims that an ad conveys, the Commission examines "the entire mosaic, rather than each tile separately."(5)

Advertisers must make truthful claims and substantiate all objective claims. These rules of the road, of course, apply both to advertisers using traditional media and those who market their products and services on the Internet, telephone, e-mail or through any other media.

The Goal of the FCC/FTC Policy Statement is to demonstrate that the general principles of advertising law apply to advertising for Dial-Around and other long distance services.

III. Application of these principles in Dial Around advertising.

A. Comparative Advertising

Comparative advertising is a popular component in many ads. There is no legal prohibition against advertisers making truthful references to competitors or competing products. However, to avoid deception, comparative advertising must be clear and, if necessary, contain appropriate disclosures. Further, an advertiser must have a reasonable basis to support its own claims, as well as the claims made about a competitor's product or services.

For example, if a company's ad conveys the representation that its telephone service rates are the lowest and uses a chart that compares its per-minute rate to the rates offered by a competitor, the advertiser must make sure that the competitor's rates are current and not outdated. In other words, when using comparative ads, the advertiser must not only make sure its own claims are truthful and substantiated, but that the information provided about the competitor is also truthful and substantiated.

B. Deception by Omission

Ads can be deceptive because of what they do not say. Let me give you a few examples. If an ad omits material information, an ad can be deceptive even if everything else in the ad is truthful. This is called deception by omission. An ad will be deceptive if it fails to disclose qualifying information that, in light of the representations made, would be necessary to prevent consumers from being misled. We determine whether material information has been omitted by examining a typical buyer's expectation and understanding of the advertiser's claims.

In the Dial Around context, if an ad represents that all calls are 10 cents a minute, but fails to disclose that all calls are subject to a 50 cent minimum charge, the ad would likely be deceptive. A reasonable consumer would likely conclude that a one minute call would be 10 cents, not 50 cents. The same would be true if an ad made specific per minute price claims but failed to disclose that there was a mandatory monthly fee.

C. Material Limitations on Service should be disclosed

Advertisers for Dial-Around and other long distance services must take special care to make certain that material limitations on services are disclosed in the ads. Given the importance of price information, any significant conditions or limitations on the availability of the advertised rates should also be disclosed clearly and conspicuously. I will talk more in a moment about what makes a disclosure clear and conspicuous. But, clear and conspicuous disclosures are important in advertising law generally, and they have special meaning in the Dial-Around context because ads are the primary source of price information for consumers.

Let me give you some examples of situations where disclosures should be used to avoid deception. If an ad features the phrase "10 cents a minute" and that rate is available only during certain times of the day, the failure to clearly and conspicuously disclose the restriction would be deceptive. Likewise, if there are significant geographic restrictions, that fact should also be disclosed. Additionally, terms such as "Basic Rate" should be used only if the meaning of that term is clear to consumers.

An ad cannot refer to a toll-free number or a website to make disclosures that should be made in an ad. While advertisers are encouraged to use customer service numbers and websites to offer consumers more information, these sources cannot cure misleading claims in the ad itself.

Advertising for Dial-Around services plays an extremely important and valuable role for consumers. For the most part, advertising is the only source of price information for consumers before they incur a charge and are billed for the service. In contrast, advertising for most products and services may or may not include the price, but the consumer generally has another opportunity to determine the total cost before making the purchase.

D. Principles of Clear and Conspicuous Disclosures

So what do I mean by clear and conspicuous disclosures? The FTC uses the term "clear and conspicuous" to describe a general performance standard that is flexible enough to take into account both the consumer's right to receive accurate information and the many ways that creative advertisers can effectively convey that information.

In simple terms, disclosures should be presented so that consumers actually see them and understand them. That means disclosures should be clear, prominent, and in close proximity to the claim being modified. There should be no distracting visual or audio elements surrounding the disclosures. Also, legalistic disclosures or those buried in fine print will not be effective. The FTC has a lot of experience with disclosures in a variety of contexts. We enforce certain statutes and regulations that are very specific as to how and when disclosures should be made.

*For example, The Pay-Per-Call Rule (previously called the 900-Number Rule)(6) mandates very specific provisions on how to make effective disclosures of material cost information in the context of advertising entertainment or information programs that are billed with consumers' telephone bills.

In print ads, the FTC has frequently found fine-print footnotes to be inadequate to disclaim or modify a claim made elsewhere in the ad.

In television ads, video superscripts that are difficult to understand, or are superimposed over distracting backgrounds, or that compete with audio elements have been found to be ineffective in disclaiming or modifying a claim in the ad.

I hope this summary of the advertising law and the application of its general principles to Dial-Around and other long distances services has been helpful. These same principles also apply to the advertising of electrical products and services and I will now shift my focus to electricity.

IV. Electricity

The Commission believes that energy deregulation may provide significant consumer benefits. Competition among market participants will ordinarily provide consumers with the benefits of lower prices, high quality products and services, and continued innovation.

A. Experience in the Industry

The FTC recently has become more active in the electricity restructuring debate. We have testified before various Congressional Committees and responded to requests for comments from a number of states. In addition, as all of you are probably aware, the Commission, along with NARUC, conducted a public workshop in September 1999 that focused on market power and consumer protection issues of interest to state regulators and Attorneys General as they introduce competition into retail electric power markets in their states.

B. Starting Point for a Competitive Electric Power Market

In undertaking these efforts we have noted that the starting point for competition in the electric power industry is not the level playing field characteristic of a newly developing market. As most of you know, vertically integrated, regulated monopolies have controlled the generation, transmission, and distribution of electric power in state-authorized geographic territories. In this context, as regulation is reduced and competition is encouraged, there is a significant potential that these powerful utilities will use their existing market power in generation, transmission and distribution services to deter competition that could benefit consumers. In addition, consumers have not previously had choices of electric power suppliers, and thus consumer protection issues need particular attention.

C. Advertising

As electricity markets become more open, a new wave of advertising for these products and services will emerge. Ads will attempt to entice consumers into choosing one product over another. In a competitive retail market, electricity service providers are likely to make a broad range of advertising claims, including claims about the nature of the service provided, the company selling the electricity, and the price for the service. The same general principles of advertising law that I described in the context of long distance services apply equally to the electric power industry. Advertising will play an especially important role for consumers because consumers are not able to verify for themselves the attributes of the electric power they purchase.

For example, we have already seen the use of environmental advertising in those states that have opened their markets to retail competition. Many consumers are interested in the environmental qualities of the electric power they buy, and some consumers are willing to pay a premium for "environmentally friendly" electric power. There is, however, a potential for abuse of environmental claims because of the premium price, and because consumers cannot verify any of these advertising claims themselves.

All of the FTC's general principles about advertising will apply to these kinds of claims; that is, advertising claims must be truthful and they must be substantiated. Substantiation of claims about electricity sources, or other characteristics, presents many challenges because new tracking systems must be developed for competitive markets, and they must provide a means of independent verification.

The FTC's Guides for the Use of Environmental Marketing Claims,(7) developed for environmental claims about any type of product, also will provide guidance to electricity marketers on acceptable advertising practices. The guides are available on our Website - FTC.GOV.

In addition, the National Association of Attorneys General ("NAAG") adopted Environmental Marketing Guidelines for Electricity in December. The intent of that project is to assist states in their efforts to encourage fair competition and to provide some consistency in enforcing truth in advertising laws in the electric power industry.

D. Uniform Disclosures

Let me say a brief word about uniform disclosures. The Commission believes that because consumers have had no prior experience in choosing an electric service provider, uniform disclosures of terms, prices, and other relevant attributes of electric power may help ensure that consumers are able to make well-informed choices and thereby reap the benefits of competition. A uniform disclosure, which contains standardized information that electric service providers would use to inform consumers in their advertising, will help ensure that consumers are not misled or confused. It also would facilitate national marketing of electric power.

E. Other Consumer Protection Issues

As electric power markets become competitive there may be an increase in various unscrupulous business practices. We may see practices by dishonest electricity service providers as we have seen in the deregulated telecom industry such as like "slamming" (changing a customer's telephone service without authorization) and "cramming" (placing unauthorized charges on a customer's bill).

Cramming may also become a problem in deregulated electricity markets. Billing formats used by electricity providers are often confusing and may be more so as retail competition is introduced. Further, there are many line item charges that consumers may have trouble identifying, making it more difficult for consumers to notice fraudulent charges. In competitive markets, the billing system will have to accommodate multiple vendors, some of whom may offer services unrelated to electricity. Moreover, billing may be handled by aggregators or service companies rather than the utility or service providers themselves.

We would ask your help in assuring that consumers are billed fairly and that the billing formats are clear and understandable.

V. Conclusion

I would like to thank Commissioner Gillis for his invitation to be here today and his efforts to raise the profile of consumer issues as competition and market forces are injected into regulated industries. I hope I was successful in providing you a summary of the Commission's advertising law principles and explaining how those principles have equal application in both the advertising of Dial-Around and other long distance services as well as in potential advertising of electricity products and services. Before I leave, I would also like to say that the FTC is proud to have been able to coordinate its efforts with our sister agency, the FCC, in the issuance of the Joint Policy Statement. Also, we are proud of our relationship with NARUC.